Bilibili: King of Mediocrity, Confidence is Being Worn Down

After the Hong Kong stock market closed on November 29th, $ 哔哩哔哩(BILI.US) released its third-quarter report. The user ecosystem remains stable, but the performance is still disappointing. However, the market expectations were relatively sufficient, so overall it was not a major disappointment, but it was also unimpressive. Looking at some forward-looking indicators, there is still no sign of the long-awaited reversal:

1. Steady traffic, but approaching bottleneck

Overall, Bilibili's platform traffic is relatively stable. Although there was still user growth in the third quarter (a net addition of 17 million users), especially with the stickiness (DAU/MAU) increasing to over 30%, the MoM growth rate, which reflects seasonal changes and is a peak season for acquiring users, has significantly slowed down compared to historical levels. The user ceiling is approaching and is almost unavoidable.

2. Gaming slump, dragging down growth

Revenue continues to be offset by gaming issues. Of course, with the continuous absence of "Pretty Derby" from the shelves, the market has gradually lowered its expectations. In the third quarter, advertising and live broadcasting businesses maintained relatively high growth, but gaming revenue declined by 33% YoY. Since the absolute value is not high, and if we don't consider minor fluctuations, the current revenue basically meets the consensus expectations.

A major game accident occurred, and it is highly likely that it will not be restored online this year. Therefore, the company expects full-year revenue to be around the lower limit of the guidance range disclosed in the previous quarter (22.5 billion to 23.5 billion), which is in line with or slightly lower than market expectations.

Since the guidance has not been further lowered, we can reluctantly find some solace and at the same time, it also indicates that there will be good advertising increment in the fourth quarter due to the flow of funds to e-commerce platforms during the Double Eleven period. In addition, live broadcasting, which is still in the early stage of development, may continue to provide some support.

However, in order to achieve overall recovery and fulfill the promise of profitability by the end of 2024, the gaming sector must regain its momentum. But based on the performance of the newly released games in the second half of the year and the news of layoffs in the self-developed team, Dolphin Research currently has little confidence. Let's see what the company has to say in the conference call.

3. Slow reduction of losses in progress

With changes in revenue structure and significant optimization of bandwidth costs, the gross profit margin continued to increase to 25% in the third quarter. Expenses have decreased YoY, and the effects of cost reduction and layoffs are still in progress. Ultimately, the operating loss rate in the third quarter improved by 5 percentage points MoM, dropping to 19%, but it is still far from the goal of balancing income and expenses by 2024.

Dolphin Research's viewpoint:

When the former rivals, Kuaishou, entered the profitable camp due to the dividends of live-streaming e-commerce, while Bilibili continues to struggle with monetization, more and more investors are voting with their feet. Bilibili's unique style also determines that even as funds leave, they will still closely monitor the changes of this Generation Z platform, hoping to reap the first wave of reversals.

However, the signals of a turnaround have not yet been reflected in Q3 report. And due to ongoing issues and strategic adjustments in the gaming business, as well as the decline in the buying dividend under the competition of e-commerce, the actual growth rate next year may still be uncertain under the sustained pressure of the macro environment. With limited advertising inventory and a business model that relies mostly on external advertising, the actual growth rate next year may still be uncertain.

Unfortunately, the commitment to achieve profitability by the end of 2024 has made Bilibili's desire for growth next year unusually high.

Let's do a simple calculation. If there are no major adjustments to Bilibili's business in the future and the platform ecosystem can operate normally (content creators can make profits), the optimization of the expenditure side is already nearing completion:

With an annual cost of 17 billion yuan, most of which (9 billion yuan in revenue sharing, 3.5 billion yuan in content costs, and 2 billion yuan in bandwidth costs) are relatively "rigid", in addition to the 10 billion yuan in expense, there is little room for large-scale optimization. Therefore, to achieve a break-even point, at least 27 billion yuan in annual revenue needs to be achieved, which is a 20% increase compared to this year's 22.5 billion yuan.

To achieve this growth, it will be difficult to rely solely on other businesses. Games must be the key. However, as of today, Bilibili's games are still relying on old games like "FGO" and "Azur Lane". Although there have been many new game releases in the second half of the year, there are hardly any games that can make a significant impact. Unless "Yojun Girl" returns next year and performs exceptionally well, how can the market believe that this small platform can fulfill its promise of profitability?

Currently, Bilibili's valuation has dropped to 1.8 times PS, which is significantly lower than other internet platforms and cannot be compared to its past glory. However, in the current situation, undervaluation is still not a sufficient reason for investment. In April next year, Bilibili has a convertible bond with a conversion price of $20 per share and a face value of $400 million. There is a risk of early redemption. According to the current performance trend, if the management does not make major changes or temporarily stimulate the stock price, the company is likely to need to redeem the bond upon maturity. Although the current cash flow (net cash of $1.3 billion) does not require financing, it will still affect the company's business strategy, with a focus on contraction.

Detailed performance data overview

The following is a detailed analysis

1. Steady traffic, approaching bottleneck

Bilibili has not explicitly stated its monthly active user data in the financial report for two consecutive quarters. The emphasis at the beginning of the year on high-quality user growth can be seen as a shift in user growth goals, which is essentially an implicit acknowledgment that the user ceiling has been reached and the cost-effectiveness of continuing to acquire new users is too low.

Since the beginning of this year, Bilibili has reduced promotion expenses in addition to layoffs. If we consider this factor and then look at the growth of Bilibili's user base, it actually confirms the platform's uniqueness - the ability to naturally attract target users.

In the third quarter, Bilibili's overall monthly active users (including App, PC, TV, etc.) reached 100 million, a year-on-year increase of 2.5% and a net increase of 17 million compared to the previous quarter.

The stickiness of existing users has improved, with DAU/MAU surpassing 30% for the first time. The average daily user duration has reached 100 minutes, setting a new record.

The number of daily active users and the amount of user-generated content from Up users increased by 21% and 37% respectively compared to the same period last year. However, due to the change in disclosure criteria from monthly active users to daily active users, direct year-on-year comparison is no longer possible. Overall, the content ecosystem appears to be relatively healthy.

2. The sustainability of advertising growth needs attention

Monetization has always been a challenge for Bilibili in the market. The fundamental reasons include not only the consumption habits of platform users but also the impact of the company's chosen business model and execution effectiveness.

In order to make up for the revenue gap in the gaming business, Bilibili has significantly accelerated its commercialization pace in the past two years. Additionally, with the increasing demand for cross-platform user acquisition due to e-commerce competition, Bilibili has also benefited from this trend. Despite the industry's overall pressure (zero growth) in the third quarter, Bilibili achieved a growth rate of over 20% due to these factors, even though it does not engage in e-commerce or have internal circulation advertising.

However, it is precisely because of this temporary period of growth that we still have many concerns about the sustainability of advertising growth:

If we take a closer look, the rapid growth of advertising for three consecutive quarters is not only due to the influx of advertising from e-commerce platforms but also from Up users on the platform.

The former can be understood, such as Bilibili's cooperation with Tmall and JD.com during the Double 11 shopping festival, which resulted in a significant increase in traffic. The latter refers to Up users who, in order to achieve a higher return on investment (ROI) after receiving orders from merchants, also purchase advertising on Bilibili to increase the exposure of their videos/live streams in the public domain pool (such as the homepage and popular sections). This kind of demand for buying traffic acts as an amplifier for the external advertising demand, which changes with the orders received by the Up hosts.

Imagine that when the macro expectations are further under pressure and the orders received by the Up hosts start to decrease, the demand for buying traffic from the Up hosts will also decrease synchronously, which will have a magnified impact on the fluctuation of performance advertising.

3. Games Completely "Shut Down"

As a former pillar business, Bilibili's games can be said to have completely "shut down", or more accurately, "temporarily shut down". First of all, the highly anticipated "Pretty Derby" was taken down shortly after its launch at the end of August and has not been restored since. There are many rumors about the reasons behind this, but Dolphin Research believes that the most plausible explanation is that there are differences between the version that applied for the license and the version that was launched. If this is indeed the reason, then they can only blame themselves. From this, it can be seen that Bilibili has many loopholes in team management.

In the third quarter, games unexpectedly declined by 33%. In fact, in addition to the incident with "Excellent Girl", several new games have been launched since July, such as "Sleuths", "Shaking Light Record: Chaotic World Princess", "Journey of a Thousand Years", and so on, but none of them have been successful. Among them, the best-performing game, "Journey of a Thousand Years", is still not as good as "Azur Lane" among all the games still in operation on Bilibili. Looking at the revenue trend, the third and fourth quarters may still rely on games like "FGO" that were licensed years ago, but deferred revenue exposes the reality, and the pressure is still high.

Since the second half of this year, competition in the domestic gaming market has become more intense as the industry recovers. The rise of casual games and the frequent release of hit games by major companies have torn the entire gaming market into two extremes: either making lightweight reskin games or focusing on quality to satisfy the increasingly demanding hardcore players. Those in the middle are becoming more and more awkward, with reduced ROI and even a situation where they stop buying traffic and lie flat. Bilibili is also one of the players in this awkward situation.

4. Live-streaming E-commerce Struggles to Shoulder the Responsibility

So, will Bilibili's heavy investment in live-streaming e-commerce this year become the second growth curve after the absence of games?

It's difficult.

First of all, we need to clarify that Bilibili's live-streaming e-commerce is not internal transactions, but external transactions through jump links. Therefore, Bilibili does not receive commissions, but advertising fees. This also indicates that Bilibili is unlikely to have internal circulation of e-commerce advertising revenue and is unlikely to enjoy most of the benefits of live-streaming e-commerce. However, Dolphin Research would like to discuss the issue of limited scale that Bilibili may encounter if it wants to engage in in-app transactions in the future.

Although emerging social platforms are benefiting from live-streaming e-commerce, such as Douyin, Kuaishou, and Xiaohongshu, the influencers who choose to promote products on Bilibili are more like long-tail anchors. Here, the long tail does not only refer to the number of fans, but also includes the influencer's ability to promote products (whether they are good at it or not, and whether their content is suitable for product promotion).

However, Dolphin Research has found that there are two phenomena in Bilibili's live-streaming e-commerce:

Bilibili's top influencers (with millions of fans) did not engage in live-streaming e-commerce during this year's highly anticipated Double 11 event on Bilibili. Instead, they chose other platforms, such as Douyin, which have larger public domain traffic and more complete user profiles.

Influencers who have found success in live-streaming e-commerce tend to be more like experts, establishing a different kind of "consumer trust" relationship to meet the demand for product recommendations. This trust is genuine, but it also presents a problem:

These influencers are not salespeople by nature, and they still have reservations about promoting products. Although they compromise and engage in product promotion to make money, they still hope to "earn money while standing." Therefore, they are more cautious in selecting products (due to personal requirements and fear of being mocked by fans), and they also advocate for rational consumption in their live-streaming rooms.

The atmosphere of live-streaming e-commerce on Bilibili, combined with the platform's deeply ingrained culture of free content and cost-effectiveness, tends to lean towards a "fresh and youthful" style. However, playing the "fresh and youthful" card also means that it is difficult to achieve large-scale operations.

5. The dividend period for live-streaming rewards is still in its early stages

In the third quarter, the growth of value-added services exceeded expectations, with a year-on-year increase of 17%, thanks to the deeper penetration of live-streaming content. However, recent content regulation and issues faced by some platforms have led to industry-wide adjustments, so it is necessary to continue monitoring the impact on the future growth rate of live-streaming.

The big member business is still digesting the impact of factors such as the quota for Japanese anime, update pace, and genre restrictions. However, in the third quarter, which is the peak season for summer vacations, coupled with the launch of some self-produced variety shows, Bilibili's big member count increased by 650,000 on a month-on-month basis, with a payment rate of 6.2%, maintaining overall stability.

However, the overall gross profit margin of the value-added services business is relatively low, and the business model is also relatively weak. To achieve sustainable profitability in the future, Bilibili still needs to rely on high-margin advertising and gaming.

6. The reason for the reduced losses is not what the market desires

In the third quarter, Bilibili's operating loss was 1.1 billion yuan, with a loss rate of 19%, a 5 percentage point improvement compared to the previous quarter. Due to the pressure on revenue, the seasonal optimization pace this year has slowed down significantly compared to Q3 of last year.

The pressure on revenue has led to Bilibili's reduced losses in the third quarter mainly due to the optimization of bandwidth costs, resulting in a gross profit margin of 25%, a historical high. The year-on-year decrease in expenses is also significant, but this is obviously not the reason for the market to see a reduction in losses.

Looking at the trend of expenditure changes since this year, there is already very little room for further optimization of cost and expenses. The major portion of costs is "rigid" expenses, and the only area that can continue to be reduced is research and development investment. For example, last month the company disbanded the Guangzhou studio team (Heart Source Interactive) that had just been acquired for over a year.

In terms of cost structure, total costs decreased by 8% year-on-year, accelerating the decline from Q2. This is mainly due to the decrease in bandwidth costs and the synchronous decrease in e-commerce costs with e-commerce revenue.

Costs as a percentage of revenue increased by 4%, which should mainly come from the allocation of fireworks advertisements to content creators, and the distribution of live streaming revenue to streamers and guilds, amid a 33% year-on-year decline in gaming revenue.

In terms of expenses, there was a 12% year-on-year decrease in the third quarter, with varying degrees of decline in sales, management, and research and development expenses. However, sales expenses still had the largest discount.

Dolphin Research "Bilibili" Historical Articles:

Earnings Season (Showing the past year)

August 17, 2023 Conference Call: "Confident in Sustained High Growth in Live Streaming and Advertising (Bilibili 2Q23 Earnings Conference Call)"

August 17, 2023 Earnings Review: "Bilibili: Can Advertising Save the Small Station? It's Not That Easy!"

June 1, 2023 Conference Call: "Bilibili Management: There are Many Misunderstandings in the Market About Us (1Q23 Conference Call Summary) June 1, 2023 Earnings Report Review: "Bilibili: The Small Broken Station that Doesn't Grow Up"

March 3, 2023 Conference Call: "Costs Decrease in the Current Year, New Games to be Launched in the Second Quarter (Bilibili Conference Call Summary)"

March 3, 2023 Earnings Report Review: "Bilibili Needs a 'iQiyi-style' Blood Transfusion"

November 29, 2022 Conference Call: "Bilibili: Firmly Focusing on Gaming as the Company's Main Business (3Q22 Conference Call Summary)"

November 29, 2022 Earnings Report Review: "Bilibili Approaching a Turning Point in Operations? Still Needing to 'Take Strong Medicine' to Break Doubts"

September 9, 2022 Conference Call: "Bilibili: Emphasizing the Importance of Commercialization in Ecological Community Construction (2Q22 Conference Call Summary)"

September 8, 2022 Earnings Report Review: "Internal Concerns Plus External Challenges, Bilibili Suffers from 'Heart Disease' that is Difficult to Cure"

June 9, 2022 Conference Call: "Bilibili: Ecological Operation Running Smoothly, Turning Point in Loss Reduction Expected in the Third Quarter (Conference Call Summary)"

June 9, 2022 Earnings Report Review: "Bilibili's Carnival is Returning to its Original Form?"

March 4, 2022 Conference Call: "Bilibili's 'Wanting It All': Wanting Advertising, Revenue, User Growth, and Cost Reduction"

March 3, 2022 Earnings Report Review: "Average Performance without Hindrance Leading to a Rise? Bilibili's Faith Comes from Rui Di" In-depth

January 6, 2023 "Pan-Entertainment 'Opening Red', Tencent, Bilibili, whose rebound is more sustainable?"

June 15, 2022 "Both are 'bleeding' giant babies, can Kuaishou and Bilibili recover?"

March 22, 2021 "Falling in value while remarrying, is Bilibili a trap or an opportunity?"

March 12, 2021 "Dolphin Research | Bilibili Series 2: Can Bilibili really never monetize?"

March 9, 2021 "Dolphin Research | How far is Bilibili from the four hundred million user market?"

Hot topics

December 14, 2021 "The carnival is over, back to being a small platform? Bilibili needs 'monetization'!"

July 27, 2021 "Bilibili, a user social platform in the Z era, still has scarcity"

Risk disclosure and statement of this article: Dolphin Research Disclaimer and General Disclosure